<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB



                                   (Mark One)

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
      EXCHANGE ACT OF 1934

                 FOR THE TRANSITION PERIOD FROM ______ TO ______

                        COMMISSION FILE NUMBER 000-12950

                          ----------------------------

                          ALLIANCE PHARMACEUTICAL CORP.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)


                 NEW YORK                                 14-1644018
     (State of Other Jurisdiction of                    (IRS Employer
      Incorporation or Organization)                 Identification No.)

   4660 LA JOLLA VILLAGE DRIVE, SUITE 740
              SAN DIEGO, CA                                  92122
  (Address of Principal Executive Offices)                 (Zip Code)


         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 410-5200


              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                          IF CHANGED SINCE LAST REPORT)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Common Stock, $0.01 par value per share, 150,000,000 shares authorized,
43,972,429 shares issued and outstanding as of May 11, 2007.

Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|









<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------

INDEX
-----

                                                                        Page No.
                                                                        --------


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheet (unaudited)                      3

         Condensed Consolidated Statements of Operations (unaudited)           4

         Condensed Consolidated Statements of Cash Flows (unaudited)           5

         Notes to Unaudited Condensed Consolidated Financial Statements        6

Item 2.  Management's Discussion and Analysis or Plan of Operation            19

Item 3.  Controls and Procedures                                              25

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                    26

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds          26

Item 3.  Defaults Upon Senior Securities                                      26

Item 4.  Submission of Matters to a Vote of Security Holders                  26

Item 5   Other Information                                                    26

Item 6.  Exhibits                                                             26


                                       2








<PAGE>
<TABLE>
<CAPTION>

PART I   FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
-------------------------------------------------------------------------------

                                                                 MARCH 31,
                                                                   2007
                                                           --------------------
ASSETS                                                          (UNAUDITED)
------

CURRENT ASSETS:
    Cash and cash equivalents                              $         1,301,000
    Other current assets                                                42,000
                                                           --------------------
              Total current assets                                   1,343,000

PROPERTY, PLANT AND EQUIPMENT - NET                                    136,000
OTHER ASSETS - NET                                                      10,000
                                                           --------------------
                                                           $         1,489,000
                                                           ====================

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
    Accounts payable                                       $           290,000
    Accrued expenses                                                   385,000
    Deferred revenue                                                   100,000
    Senior notes payable and accrued interest                       11,304,000
                                                           --------------------
              Total current liabilities                             12,079,000

OTHER LIABILITIES                                                      750,000
                                                           --------------------

              Total liabilities                                     12,829,000
                                                           --------------------

STOCKHOLDERS' DEFICIT:
    Preferred stock - $0.01 par value;
      5,000,000 shares authorized;
      Series F preferred stock - 793,750
      shares issued and outstanding,
      liquidation preference of $31,750,000                              8,000
    Common stock - $0.01 par value;
      150,000,000 shares authorized;
      41,331,319 shares issued and outstanding                         413,000
    Additional paid-in capital                                     483,757,000
    Accumulated deficit                                           (495,518,000)
                                                           --------------------
              Total stockholders' deficit                          (11,340,000)
                                                           --------------------
                                                           $         1,489,000
                                                           ====================

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                        3








<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------------

                                                        THREE MONTHS ENDED                        NINE MONTHS ENDED
                                                             MARCH 31,                                MARCH 31,
                                                      2007               2006                  2007               2006
                                                ----------------   ----------------      ----------------   ----------------
                                                            (UNAUDITED)                              (UNAUDITED)
<S>                                             <C>                <C>                   <C>                <C>
REVENUES:
   Royalty, license and research                $       521,000    $        26,000       $       548,000    $       103,000

OPERATING EXPENSES:
   Research and development                             269,000            469,000             1,607,000          1,305,000
   General and administrative                           264,000            311,000             1,143,000            911,000
                                                ----------------   ----------------      ----------------   ----------------
                                                        533,000            780,000             2,750,000          2,216,000
                                                ----------------   ----------------      ----------------   ----------------
LOSS FROM OPERATIONS                                    (12,000)          (754,000)           (2,202,000)        (2,113,000)

INVESTMENT INCOME                                        22,000             49,000                99,000            151,000
OTHER INCOME                                                  -                  -                     -             82,000
INTEREST EXPENSE                                       (221,000)          (161,000)             (711,000)          (475,000)
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY                  -                  -               357,000                  -
GAIN ON DISPOSITION OF LIABILITIES                            -                  -                     -            730,000
GAIN ON DISPOSITION OF ASSETS                                 -                  -               659,000            476,000
                                                ----------------   ----------------      ----------------   ----------------
NET LOSS                                        $      (211,000)   $      (866,000)      $    (1,798,000)   $    (1,149,000)
                                                ================   ================      ================   ================

NET LOSS PER COMMON SHARE,
                    BASIC AND DILUTED           $         (0.01)   $         (0.02)      $         (0.05)   $         (0.03)
                                                ================   ================      ================   ================

WEIGHTED AVERAGE SHARES OUTSTANDING,
                    BASIC AND DILUTED                40,574,000         34,830,000            39,449,000         34,830,000
                                                ================   ================      ================   ================

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       4








<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------

                                                                                     NINE MONTHS ENDED
                                                                                         MARCH 31,
                                                                                  2007               2006
                                                                            ----------------   ----------------
                                                                                        (UNAUDITED)
OPERATING ACTIVITIES:
   Net loss                                                                 $    (1,798,000)   $    (1,149,000)
   Adjustments to reconcile net loss to net cash
         used in operating activities:
      Depreciation and amortization                                                  25,000             16,000
      Accrued interest on senior notes                                              711,000            475,000
      Compensatory stock options                                                     44,000             25,000
      Change in fair value of derivative liability                                 (357,000)                 -
      Gain on disposition of liabilities                                                  -           (730,000)
      Gain on disposition of assets                                                (659,000)          (476,000)
      Changes in operating assets and liabilities:
         Other assets                                                                12,000          1,020,000
         Accounts payable, accrued expenses and other                              (346,000)        (2,026,000)
                                                                            ----------------   ----------------
Net cash used in operating activities                                            (2,368,000)        (2,845,000)
                                                                            ----------------   ----------------

INVESTING ACTIVITIES:
   Purchases of property and equipment                                              (74,000)            (4,000)
   Proceeds from disposition of assets                                              100,000            200,000
                                                                            ----------------   ----------------
Net cash provided by investing activities                                            26,000            196,000
                                                                            ----------------   ----------------


DECREASE IN CASH AND CASH EQUIVALENTS                                            (2,342,000)        (2,649,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                  3,643,000          6,782,000
                                                                            ----------------   ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $     1,301,000    $     4,133,000
                                                                            ================   ================

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
   Issuance of common stock upon conversion of senior notes                 $       655,000    $             -
                                                                            ================   ================
   Reclassification of derivative liability                                 $       484,000    $             -
                                                                            ================   ================

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                        5
</TABLE>









<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                   THREE AND NINE MONTHS ENDED MARCH 31, 2007

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

      Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company," "Alliance," "we" or "us") are engaged in identifying, designing and
developing novel medical products. Currently, the Company is focused on
developing its lead product, OXYGENT(TM), an intravascular oxygen carrier
designed to augment oxygen delivery in surgical patients at risk of acute tissue
hypoxia (oxygen deficiency).

LIQUIDITY AND BASIS OF PRESENTATION

      The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has incurred
operating losses through March 31, 2007 and has negative working capital at that
date of approximately $10.7 million. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.

      As discussed in Note 5, in June 2004, the Company completed a private
placement financing with net proceeds to the Company of approximately $10
million from the sale of common stock (the "June 2004 Private Placement"). In
September 2004, the terms of the June 2004 Private Placement were renegotiated
by mutual agreement of the Company and investors holding approximately $10.7
million of the original $11 million invested by the various investors in the
June 2004 Private Placement. Concurrently, investors who elected to rescind the
June 2004 Private Placement were issued senior convertible promissory notes in
like investment amounts (the "Senior Notes"), which, unless previously
converted, matured and the unpaid principal, together with accrued interest,
became due and payable on April 1, 2007.

      In connection with the Senior Notes becoming due and payable, Alliance
held two teleconferences with the holders of the outstanding Senior Notes. The
first teleconference took place on March 30, 2007. This teleconference was
repeated on April 2, 2007. In connection with the teleconferences, the Company
requested that each holder of a Senior Note execute an amendment to extend the
maturity date of the Senior Note from April 1, 2007 to June 30, 2008. This
amendment has been approved by substantially all of the Senior Note holders (see
Note 7). Alliance intends to seek additional financing to fund its continuing
operations through June 2008. Because adequate funds have not been available to
the Company in the past, the Company has already delayed its OXYGENT development
efforts and has delayed, scaled back, and/or eliminated one or more of its other
product development programs. The accompanying unaudited condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome of this
uncertainty.

                                       6








<PAGE>

PRINCIPLES OF CONSOLIDATION

      The accompanying unaudited condensed consolidated financial statements
include the accounts of Alliance Pharmaceutical Corp., the accounts of its
wholly owned subsidiaries - Molecular Biosystems, Inc. ("MBI") and Astral, Inc.
("Astral") (until September 6, 2005), and its majority-owned subsidiaries -
Talco Pharmaceutical, Inc. and PFC Therapeutics, LLC ("PFC Therapeutics"). The
Company's subsidiaries have minimal operations and all significant intercompany
accounts and transactions have been eliminated.

INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS

      The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. These principles are consistent in all material respects with those
applied in the Company's financial statements contained in the Company's annual
report on Form 10-KSB for the fiscal year ended June 30, 2006, and pursuant to
the instructions to Form 10-QSB and Item 310(b) of Regulation S-B promulgated by
the Securities and Exchange Commission (the "SEC"). Interim financial statements
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (all of
which are of a normal recurring nature, including the elimination of
intercompany accounts) necessary to present fairly the financial position,
results of operations and cash flows of the Company for the periods indicated.
Interim results of operations are not necessarily indicative of the results to
be expected for the full year or any other interim periods. These unaudited
condensed consolidated financial statements should be read in conjunction with
the financial statements and footnotes thereto contained in the Company's annual
report on Form 10-KSB for the year ended June 30, 2006.

USE OF ESTIMATES

      The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the condensed consolidated
financial statements. Significant estimates made by management include, among
others, recoverability of property, plant and equipment and the valuation of
deferred tax assets and derivative liabilities. Actual results could differ from
those estimates.

CASH AND CASH EQUIVALENTS

      The Company considers instruments purchased with an original maturity of
three months or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK

      Cash and cash equivalents are financial instruments that potentially
subject the Company to concentration of credit risk. The Company invests its
excess cash primarily in U.S. government securities and debt instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities to
maintain safety and liquidity. These guidelines are reviewed periodically and
modified to take advantage of trends in yields and interest rates. The Company
places its cash with high quality financial institutions and at times may have
deposits which exceed the Federal Deposit Insurance Corporation (the "FDIC")
$100,000 insurance limit. At March 31, 2007, the Company had approximately $1.2
million in these accounts in excess of the FDIC insurance limits.

                                       7








<PAGE>

PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to five years. Major betterments and renewals are capitalized, while
routine repairs and maintenance are charged to expense when incurred.

      The Company assesses the recoverability of property, plant and equipment
by determining whether such assets can be recovered through projected
undiscounted cash flows. The amount of impairment, if any, is measured based on
fair value and is charged to operations in the period in which impairment is
determined by management. At March 31, 2007, management has determined that
there is no impairment of property, plant and equipment. There can be no
assurance, however, that market conditions will not change, which could result
in future property, plant and equipment impairment.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS

      As a result of the amendment to its Senior Convertible Promissory Note
Purchase Agreement and Registration Rights Agreement (the "2006 Amendment") in
April 2006 (see Note 5), the Company did not have a sufficient number of
authorized shares to settle outstanding and exercisable options, warrants and
convertible instruments until November 14, 2006, when the Company's shareholders
at its Annual Meeting approved an amendment of the Company's Certificate of
Incorporation, as amended, to increase the number of authorized shares of common
stock from 125 million to 150 million. The amendment was filed with the
Secretary of State of the State of New York on December 15, 2006. Under the
provisions of Emerging Issues Task Force ("EITF") Issue No. 00-19, "ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A
COMPANY'S OWN STOCK," as a result of the 2006 Amendment, the Company was
required to classify all non-employee options and warrants as derivative
liabilities, totaling $3.5 million as of the 2006 Amendment date, and record
them at their fair values at the date of the 2006 Amendment. Any change in fair
value was required to be recorded as non-operating, non-cash income or expense
at each subsequent balance sheet date until the Company had a sufficient number
of authorized shares to settle its convertible instruments and non-employee
options and warrants, which date was November 14, 2006. At the date of the 2006
Amendment, the Company reclassified the fair value of non-employee options and
warrants of $3.5 million from additional paid-in capital to derivative
liability. On November 14, 2006, the date of the approval of the increase in
authorized shares, the Company reclassified the fair value of the derivative
liability of $484,000 to additional paid-in capital. The total non-operating,
non-cash income recorded for the nine-month period was $357,000.

      Warrant-related derivatives were valued using the Black-Scholes Option
Pricing Model with the following assumptions during the period ended November
14, 2006: dividend yield of 0%; annual volatility of 165%; and risk free
interest rate of 4.95%.

      The following is a summary of the changes to the derivative liability
during the period ended March 31, 2007:

          Derivative liability, June 30, 2006                    $  841,000
          Change in fair value                                     (357,000)
                                                                 -----------
          Derivative liability, November 14, 2006                $  484,000
          Reclassification to equity upon approval of
            increase in authorized shares, November 14, 2006     $ (484,000)
                                                                 -----------

          Derivative liability, March 31, 2007                   $      -0-
                                                                 ===========


                                       8








<PAGE>

REVENUE RECOGNITION

      The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS," as
revised by SAB No. 104. As such, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, or services have
been performed, the price is fixed or readily determinable and collectibility is
probable.

      Revenue is deferred until all contractual obligations have been satisfied.

      RESEARCH AND DEVELOPMENT REVENUES UNDER COLLABORATIVE AGREEMENTS

      Research and development revenues under collaborative agreements are
recognized as the related expenses are incurred, up to contractual limits.
Payments received under these agreements that are related to future performance
are deferred and recorded as revenue as they are earned over the specified
future performance period. Revenue related to nonrefundable, upfront fees are
recognized over the period of the contractual arrangements as performance
obligations related to the services to be provided have been satisfied. Revenue
related to milestones is recognized upon completion of the milestone's
performance requirement.

      LICENSING AND ROYALTY REVENUES

      Licensing and royalty revenues for which no services are required to be
performed in the future are recognized immediately, if collectibility is
reasonably assured.

RESEARCH AND DEVELOPMENT EXPENSES

      Research and development expenditures are charged to expense as incurred.
Research and development expenditures include the cost of salaries and benefits
for clinical, scientific, manufacturing, engineering and operations personnel,
payments to outside researchers for preclinical and clinical trials and other
product development work, payments related to facility lease and utility
expenses, depreciation and amortization, patent costs, as well as other
expenditures. During the nine-month periods ended March 31, 2007 and 2006, the
Company incurred research and development expenses of $1.6 million and $1.3
million, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amount of certain of the Company's financial instruments as
of March 31, 2007 approximates their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash,
accounts payable, accrued expenses and other liabilities. The carrying value of
debt approximates fair value as the related interest rate approximates a rate
currently available to the Company.

COMPUTATION OF NET LOSS PER COMMON SHARE

      Basic loss per share was computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. All potential
dilutive common shares have been excluded from the calculation of diluted loss
per share for the three and nine months ended March 31, 2007 and 2006, as their
inclusion would be anti-dilutive. The outstanding potentially dilutive common
shares totaled 67,164,469 for the three and nine months ended March 31, 2007 and
46,402,356 and 46,439,231 for the three and nine months ended March 31, 2006,
respectively.

                                       9








<PAGE>

ACCOUNTING FOR STOCK-BASED COMPENSATION

      At March 31, 2007, the Company has two stock-based employee compensation
plans.

      On July 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"SHARE-BASED PAYMENT" ("SFAS No. 123(R)"), which establishes standards for the
accounting of transactions in which an entity exchanges its equity instruments
for goods or services, primarily focusing on accounting for transactions where
an entity obtains employee services in share-based payment transactions. SFAS
No. 123(R) requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, including stock
options, based on the grant-date fair value of the award and to recognize it as
compensation expense over the period the employee is required to provide service
in exchange for the award, usually the vesting period. SFAS No. 123(R)
supersedes the Company's previous accounting under Accounting Principles Board
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") for
periods beginning in the Company's fiscal 2007. In March 2005, the SEC issued
SAB No. 107 relating to SFAS No. 123(R). The Company has applied the provisions
of SAB No. 107 in its adoption of SFAS No. 123(R).

      The Company adopted SFAS No. 123(R) using the modified prospective
transition method, which required the application of the accounting standard as
of July 1, 2006, the first day of the Company's fiscal year 2007. The Company's
condensed consolidated financial statements as of and for the three and nine
months ended March 31, 2007 reflect the impact of adopting SFAS No. 123(R). In
accordance with the modified prospective transition method, the Company's
condensed consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS No. 123(R).

      SFAS No. 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company's
condensed consolidated statement of operations. Prior to the adoption of SFAS
No. 123(R), the Company accounted for stock-based payments to employees and
directors using the intrinsic value method in accordance with APB 25 as allowed
under SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No. 123")
and, as such, generally recognized no compensation cost for employee stock
options. During the three and nine months ended March 31, 2006, no stock-based
employee compensation cost was reflected in the accompanying condensed
consolidated statements of operations, as all options granted under those plans
had exercise prices equal to or greater than the market value of the underlying
common stock on the date of grant.

      Stock-based compensation expense recognized during the period is based on
the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Stock-based compensation expense recognized
in the Company's condensed consolidated statements of operations for the three
and nine months ended March 31, 2007 included compensation expense for
share-based payment awards granted prior to, but not yet vested as of June 30,
2006 based on the grant date fair value estimated in accordance with the pro
forma provisions of SFAS No. 123 and compensation expense for the share-based
payment awards granted subsequent to June 30, 2006 based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123(R). As
stock-based compensation expense recognized in the condensed consolidated
statements of operations for the three and nine months ended March 31, 2007 is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. The estimated average forfeiture rate for the three
and nine months ended March 31, 2007 of approximately 2% was based on historical
forfeiture experience and estimated future employee forfeitures. The estimated
term of option grants for the three and nine months ended March 31, 2007 was
seven years. In the Company's pro forma information required under SFAS No. 123
for the periods prior to fiscal 2007, the Company accounted for forfeitures as
they occurred.

                                       10








<PAGE>

      SFAS No. 123(R) requires cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash flows. Due to the Company's
loss position, there were no such tax benefits during the three and nine months
ended March 31, 2007. Prior to the adoption of SFAS No. 123(R), those benefits
would have been reported as operating cash flows had the Company received any
tax benefits related to stock option exercises.

DESCRIPTION OF PLANS

      The Company's stock option plans provide for grants of options to
employees and directors of the Company to purchase the Company's shares, as
determined by management and the board of directors, at the fair value of such
shares on the grant date. The options generally vest over a four to five-year
period beginning on the date of grant up to one year after the date of grant and
have a ten-year term. As of March 31, 2007, the Company is authorized to issue
up to 8,100,000 shares under these plans and has 3,935,610 shares available for
future issuance.

SUMMARY OF ASSUMPTIONS AND ACTIVITY

      The fair value of stock-based awards to employees and directors is
calculated using the Black-Scholes option pricing model, even though the model
was developed to estimate the fair value of freely tradable, fully transferable
options without vesting restriction, which differ significantly from the
Company's stock options. The Black-Scholes model also requires subjective
assumptions regarding future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The expected term of
options granted is derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate selected to
value any particular grant is based on the U.S Treasury rate that corresponds to
the pricing term of the grant effective as of the date of the grant. The
expected volatility is based on the historical volatility of our common stock.
These factors could change in the future, affecting the determination of
stock-based compensation expense in future periods. There were 57,500 and
467,500 options granted during the nine-month periods ended March 31, 2007 and
2006, respectively.

      The following table illustrates the effect on net loss and net loss per
share for the three and nine months ended March 31, 2006 as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to options granted
under the Company's stock option plans. For purposes of this pro forma
disclosure, the fair value of the options is estimated using the Black Scholes
option-pricing model and amortized on a straight-line basis to expense over the
options' vesting periods:

                                       11








<PAGE>
<TABLE>
<CAPTION>
                                                                THREE MONTHS        NINE MONTHS
                                                                    ENDED              ENDED
                                                                   MARCH 31,          MARCH 31,
                                                                     2006               2006
                                                               ----------------   ----------------
<S>                                                            <C>                <C>
Net loss:
     As reported                                               $       (866,000)  $    (1,149,000)
     Total stock-based employee compensation
        expense determined under fair-value-based
        method for all awards, net of tax-related effects               (32,000)         (265,000)
                                                               -----------------  ----------------
     Pro forma                                                 $       (898,000)  $    (1,414,000)
                                                               =================  ================

Net loss per share, basic and diluted:
     As reported                                               $          (0.02)  $         (0.03)
                                                               =================  ================
     Pro forma                                                 $          (0.03)  $         (0.04)
                                                               =================  ================
</TABLE>

      A summary of option activity as of March 31, 2007 and changes during the
nine months then ended is presented below:

<TABLE>
<CAPTION>
                                                                       MARCH 31, 2007
                                               ----------------------------------------------------------------
                                                                      WEIGHTED-AVERAGE
                                                              ---------------------------------
                                                                                REMAINING
                                                                               CONTRACTUAL        AGGREGATE
                                                                  EXERCISE        TERM            INTRINSIC
                                                  SHARES            PRICE        (YEARS)            VALUE
                                               ----------------------------------------------------------------
<S>                                               <C>             <C>             <C>             <C>
Options outstanding at July 1, 2006               2,937,018       $   5.65        7.51
Options granted                                      57,500       $   0.13
Options forfeited/expired                           (64,260)      $  67.52
Options exercised                                         -
                                               --------------------------------
Options outstanding at March 31, 2007             2,930,258       $   4.18        6.97            $ 4,425
                                               ----------------------------------------------------------------
Options expected to vest at March 31, 2007          583,100       $   0.22        8.17            $ 2,009
                                               ----------------------------------------------------------------
Options exercisable at March 31, 2007             2,335,258       $   5.19        6.67            $ 2,375
                                               =================================================================
</TABLE>

      There were 57,500 options granted with a weighted average grant date fair
value of $0.13 per share and no options exercised during the nine months ended
March 31, 2007.

      As of March 31, 2007, there was approximately $44,000 of total
unrecognized compensation cost related to employee and director stock option
compensation arrangements. That cost is expected to be recognized on a
straight-line basis over the next five years on average. The total fair value of
shares vested during the nine months ended March 31, 2007 related to employee
and director options and options issued to consultants was approximately $43,000
and $1,000 respectively, net of an estimated forfeiture rate of 2%.

      As a result of adopting SFAS No. 123(R) on July 1, 2006, the Company's net
loss for the three and nine months ended March 31, 2007 was approximately
$14,000 and $44,000 higher, respectively, than if it had continued to account
for share-based compensation under APB 25. Net loss per share for the three and
nine months ended March 31, 2007 was the same. The Company allocated $43,000 of
the stock-based compensation expense related to employee and director stock
options to general and administrative expenses and $1,000 of the stock-based
compensation expense related to consultant stock options to research and
development expenses.

                                       12








<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48"). This interpretation
clarifies the application of SFAS No. 109, "ACCOUNTING FOR INCOME TAXES" by
defining criteria that an individual tax position must meet for any part of the
benefit of that position to be recognized in a company's financial statements
and also provides guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company expects to adopt FIN 48 on July 1, 2007. The Company is
currently assessing the impact the adoption of FIN 48 will have on its financial
position and results of operations.

2.    PFC THERAPEUTICS, LLC

      On December 22, 2004, PFC Therapeutics and LEO Pharma A/S ("LEO"), one of
the leading Danish research-based pharmaceutical companies that markets
significant products within the fields of dermatology, metabolic disease,
cardiovascular disease, ophthalmology and antibiotics, signed an exclusivity
agreement to enter into a license agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe (EU member countries, EU
membership applicants, Norway and Switzerland) and Canada (the "LEO Exclusivity
Agreement"). The terms of the license agreement, if entered into, will include
certain initial and future payments to PFC Therapeutics upon the completion of
various regulatory and commercial milestones for OXYGENT development in Europe
and royalties on commercial sales of OXYGENT in Europe and Canada. On January 5,
2005, the Company received the non-refundable portion of an exclusivity fee of
$100,000 per the terms of the LEO Exclusivity Agreement. Because the amendment
discussed below extends LEO's due diligence time-period, this amount has been
deferred and is included in current liabilities in the accompanying condensed
consolidated balance sheet at March 31, 2007.

      On February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO
Exclusivity Agreement. The amendment extends the period of time in which LEO may
undertake its due diligence investigation from March 1, 2005 to a date that is
sixty (60) days after submission by the Company to LEO of the results of a Phase
2b "proof of concept" clinical study in surgery patients to be conducted by the
Company to confirm the results of an earlier study. The remaining terms of the
LEO Exclusivity Agreement remain in full force and effect, provided that any
definitive license agreement entered into between PFC Therapeutics and LEO
relating to the marketing and commercialization of OXYGENT will include an
additional milestone payment, the amount of which is to be proposed by Alliance,
relating to the "proof of concept" clinical trial referenced above.

      On May 16, 2005, PFC Therapeutics and Beijing Double-Crane Pharmaceutical
Co., Ltd. ("Double-Crane"), the market leader for IV solutions and one of the
largest pharmaceutical companies in the People's Republic of China (the "PRC"),
entered into a development, license and supply agreement ("Double-Crane
Agreement") for the development of OXYGENT in the PRC. Pursuant to the
Double-Crane Agreement, Double-Crane made an upfront license fee payment and
will make certain milestone and royalty payments to the Company. The upfront
license fee of $500,000 was deferred until the Company's obligations to perform
were satisfied. These obligations included the transfer and translation of all
intellectual property, preclinical, clinical and regulatory data necessary for
Double-Crane's clinical development and Investigational New Drug ("IND")
application to the State Food and Drug Administration PRC (the "sFDA"). This
transfer and all other obligations were completed during the quarter ended March
31, 2007, thus such amount was recognized as license revenue.

                                       13








<PAGE>

      Double-Crane intends to pursue an intraoperative and postoperative
transfusion avoidance endpoint. Double-Crane's clinical development plan would
incorporate a new protocol design that is intended to build on the previously
conducted Alliance Phase 2 and Phase 3 clinical trials. In these studies, the
efficacy of OXYGENT in terms of drug activity (i.e., its ability to deliver
oxygen) enabled patients to remain physiologically stable at lower
intraoperative Hb levels. OXYGENT was shown to be statistically better than
blood in reversing, as well as maintaining reversal of, physiological
transfusion triggers. Importantly, the Double-Crane study will not employ any
blood harvesting techniques (i.e., acute normovolemic hemodilution or
intraoperative autologous donation), which were implicated in safety issues in a
previous Alliance Phase 3 clinical trial.

      Double-Crane is obligated pursuant to its agreement with Alliance to
conduct clinical trials in China in accordance with International Conference on
Harmonization of Technical Requirements for Registration of Pharmaceuticals for
Human Use (ICH) Guidelines, which would allow Alliance to use any data derived
from the clinical trials in other countries.

      Double-Crane will have the option to manufacture OXYGENT in the PRC after
obtaining approval from the regulatory authorities in the PRC and they will also
have a right of first refusal to add specific additional countries to the
Double-Crane Agreement upon further negotiation with the Company.

3.    ASTRAL, INC.

      On September 6, 2005, Alliance and Astral entered into an asset
contribution agreement (the "Astral Agreement") with MultiCell Technologies,
Inc. ("MultiCell") and Astral Therapeutics, Inc. ("Astral Therapeutics")
pursuant to which Alliance and Astral contributed all of their respective assets
(including intellectual property, laboratory equipment and furniture), which had
a net book value of zero at the date of contribution, that relate primarily to
the business of Astral to Astral Therapeutics, a new entity formed for the
purpose of further developing the Astral assets. In return, Alliance received an
amount of common stock (490,000 shares) of Astral Therapeutics equal to
approximately 49% of the outstanding capital stock of Astral Therapeutics. In
addition, in connection with this transaction, Astral Therapeutics assumed
certain obligations and liabilities of Alliance with respect to the Astral
assets. Subsequent to the transfer of the Astral assets, MultiCell purchased $2
million in Series A Preferred Stock of Astral Therapeutics. MultiCell paid $1
million of this amount at the closing of the purchase of the Series A Preferred
Stock and paid the balance in four quarterly installments of $250,000 through
September 2006 pursuant to a promissory note that was secured by a pledge of $1
million in value of Astral Therapeutics Series A Preferred Stock. After the
purchase and sale of the Series A Preferred Stock of Astral Therapeutics to
MultiCell, Alliance owned approximately 33% of the fully diluted outstanding
capital stock of Astral Therapeutics. Pursuant to the Astral Agreement,
MultiCell assumed all of Astral's obligations under Astral's assignment
agreement with Mixture Sciences, Inc. ("Mixture Sciences"). In total, the
Company transferred approximately $730,000 of net liabilities to Astral
Therapeutics (which amount was recorded as a gain on disposition of liabilities
during the year ended June 30, 2006) in exchange for 490,000 shares of common
stock of Astral Therapeutics. Subsequently, Astral Therapeutics' name was
changed to MultiCell Immunotherapeutics, Inc. ("MCTI").

      It was determined by the Company's management that MCTI has sufficient
equity or that MCTI's equity holders have adequate decision-making authority or
the obligation and right as equity holders to absorb MCTI's expected losses or
to receive its expected residual returns. Therefore, MCTI is not subject to FASB
Interpretation No. 46 "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" and such
investment is accounted for under the equity method.

                                       14








<PAGE>

4.    SALE OF IMAGENT(R) ASSETS

      On June 18, 2003, Imcor Pharmaceutical Co. ("Imcor"), formerly known as
Photogen Technologies, Inc., acquired certain assets and assumed certain
liabilities from Alliance. The assets acquired by Imcor included all of
Alliance's assets related to designing, developing, manufacturing, marketing,
selling, licensing, supporting and maintaining its IMAGENT product, an
ultrasound contrast agent that was approved by the United States Food and Drug
Administration (the "FDA") for marketing in the U.S. in June 2002. The amount of
consideration was determined through arms-length negotiation. To the extent
obligations with certain creditors were completely settled, Alliance recorded a
gain from sale of assets of approximately $10.6 million during the year ended
June 30, 2003, approximately $15 million during the year ended June 30, 2004,
approximately $306,000 during the year ended June 30, 2005, approximately
$476,000 during the year ended June 30, 2006 and $659,000 during the nine months
ended March 31, 2007 (see below) related to the disposition of these assets. To
date, Alliance has recorded approximately $27 million as a gain on the
disposition of an asset as a result of Imcor issuing shares of its stock valued
at approximately $3.7 million to Alliance creditors, Imcor funding approximately
$1.9 million of Alliance's obligations, and approximately $21.4 million related
to settlement agreements or Imcor's assumed obligations of Alliance.

      In September 2005, Alliance and Imcor entered into a global settlement
agreement (the "Imcor Settlement Agreement") pursuant to which each party
released the other from any further obligation under the IMAGENT Asset Purchase
Agreement, effectively terminating all ongoing obligations and rights under the
agreement, and providing for the allocation between the parties of the proceeds
of any future transaction involving the disposition of the IMAGENT asset. In
addition, the parties agreed to a settlement of the Amersham Health Inc.,
Amersham Health AS and Amersham plc (collectively, "Amersham") litigation, in
which all parties granted each other fully paid-up, irrevocable, royalty-free,
non-exclusive cross-licenses, with the right to sublicense, and mutual releases.
Alliance received $200,000 as a result of the above settlement agreements during
the quarter ended September 30, 2005.

      Imcor has announced that it has adopted a restructuring plan whereby it is
evaluating alternatives with respect to efforts to sell or otherwise maximize
asset values related to the IMAGENT technology, and is considering the sale or
license of its IMAGENT assets, a merger or other material transaction. Since
such a transaction may include selling the IMAGENT technology, a license or sale
of the patent portfolio underlying the IMAGENT technology, a manufacturing
rights agreement, or another form of transaction, Alliance has determined that
there will be no future IMAGENT earn-out payments and deferred royalties
previously recorded will not be paid; therefore, Alliance recognized $500,000 in
deferred royalties as gain on disposition of an asset during the nine-month
period ended March 31, 2007.

      In November 2006, Imcor entered into an amended and restated license
agreement with one of its partners. Pursuant to the terms of the Imcor
Settlement Agreement mentioned above, an aggregate of $100,000 (approximately
$91,000 net, after deducting the Company's allocated share of direct expenses)
was paid to Alliance during the nine-month period ended March 31, 2007.

                                       15








<PAGE>

5.    DEBT OBLIGATIONS

PFC NOTE

      On November 20, 2003, PFC Therapeutics issued a secured convertible note
in the principal amount of $500,000 (the "PFC Note") to an investor. The
investor also received a warrant to purchase a number of units of ownership
interests of PFC Therapeutics representing 10% of its issued and outstanding
units (determined on a fully-diluted basis on the date of exercise of the
warrant) at an exercise price of $0.01 per unit, at any time or from time to
time from January 31, 2004 to and including January 31, 2009. In September 2004,
the holder of the PFC Note exchanged such warrant for 2,500,000 shares of common
stock of the Company, which were issued in October 2004, valued at $1 million
based on the estimated fair value on the date of issuance, and the PFC Note for
a Senior Note (described below) in the principal amount of $500,000.

SENIOR NOTES PAYABLE

      On July 2, 2004, Nycomed Denmark ApS ("Nycomed") notified the Company that
it was unilaterally terminating its Development, Assignment and Supply Agreement
(the "Nycomed Agreement") effective August 16, 2004. Subsequently, a dispute
arose between the Company and some of its investors who participated in the June
2004 Private Placement. After considering all of the facts and circumstances
relevant to the dispute, the Company's Board of Directors determined that it was
in the Company's and the Company's shareholders' best interests to offer, as a
settlement of the dispute, to rescind the June 2004 Private Placement.

      On September 24, 2004, investors holding 30,546,423 shares of common stock
and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million of the $11 million invested in the June 2004 Private
Placement elected to rescind the June 2004 Private Placement. In doing so, each
of these investors returned to the Company its stock certificate representing
the number of shares and the warrant that it received in the June 2004 Private
Placement for cancellation. Immediately thereafter, these same investors entered
into the Senior Note Purchase Agreement whereby the Company issued to such
investors Senior Notes convertible into common stock at $0.25 per share, which
was subsequently amended (see below), in principal amounts equal to the amounts
such investors invested in the June 2004 Private Placement.

      After giving effect to both transactions, the Company issued 880,714
shares of common stock and warrants to purchase 660,536 shares of common stock
in the June 2004 Private Placement, and the Company issued Senior Notes in an
aggregate principal amount of approximately $10.7 million.

      The Senior Notes were due March 24, 2006, and bore interest at 6% per
annum. In April 2006, the Company entered into the 2006 Amendment with each of
the existing holders of Alliance's Senior Notes. Pursuant to the 2006 Amendment,
the maturity date of each outstanding Senior Note was extended from March 24,
2006 to April 1, 2007. The conversion price of each Senior Note was reduced from
$0.25 to $0.17, and the interest accrued on each Senior Note from March 25, 2006
through April 1, 2007 was increased from 6% to 10% per annum. In addition to the
amounts due under the Senior Notes, the holders of the Senior Notes are entitled
to receive up to an aggregate of $11.4 million in payments based on future
royalties from OXYGENT product sales (or under certain conditions from milestone
payments) payable at a rate equal to 50% of such payments Alliance actually
receives (see Note 7).

                                       16








<PAGE>

      Since the 2006 Amendment of the Senior Notes resulted in terms that,
pursuant to EITF Issue No. 96-19, "DEBTOR'S ACCOUNTING FOR A MODIFICATION OR
EXCHANGE OF DEBT INSTRUMENTS," are substantially different from the terms of the
original Senior Notes, the modification was treated as an extinguishment of debt
in the year ended June 30, 2006. The Company recorded a total debt discount of
$10.1 million in connection with the conversion feature of the amended Senior
Notes, based on the difference between the $0.17 amended conversion rate of the
Senior Notes and the closing price of $0.32 of the Company's common stock on the
date of the 2006 Amendment. The discount was immediately recorded as an expense
in connection with the extinguishment of debt and was included in the
consolidated statement of operations at June 30, 2006.

      The 2006 Amendment caused the Company to have an insufficient number of
authorized shares to settle all outstanding and exercisable options, warrants
and convertible instruments until shareholders approved an increase in
authorized shares of common stock on November 14, 2006 (see Note 1). As a
result, under EITF No. 00-19, all non-employee options and warrants were
classified as derivative liabilities and recorded at their fair values at each
balance sheet date. During the period ended November 14, 2006, the Company
recognized other income of $357,000 and the derivative liability balance of
$484,000 at that date was reclassified to additional paid-in capital since the
increase in the number of shares approved by the shareholders (see Note 1) was
sufficient to settle all outstanding convertible instruments; thus there was no
derivative liability at March 31, 2007.

      The Senior Notes can be converted at anytime prior to the maturity date
(see Note 7). During the nine months ended March 31, 2007, holders of certain
Senior Notes converted an aggregate of approximately $655,000 in principal into
an aggregate of 3,855,016 shares of common stock at a conversion price of $0.17
per share. At March 31, 2007, the principal and accrued interest balances
approximate $9.4 million and $1.9 million, respectively.

      The Senior Notes are currently in default and the Company is in the
process of renegotiating the repayment terms (see Note 7).

OTHER COMMITMENTS

      The Company leases the facilities in which it operates under certain
non-cancelable operating leases. Payments for the office facilities approximate
$10,000 per month and the leases expire September 30, 2007.

INDEMNIFICATION OBLIGATIONS

      The Company has undertaken certain indemnification obligations pursuant to
which it may be required to make payments to an indemnified party in relation to
certain transactions. The Company has agreed to indemnify its directors,
officers, employees and agents to the maximum extent permitted under the laws of
the State of New York. In connection with its facility leases, the Company has
agreed to indemnify its lessors for certain claims arising from the use of the
facilities. In connection with certain of its debt, stock purchase and other
agreements, the Company has agreed to indemnify lenders, sellers and various
other parties for certain claims arising from the Company's breach of
representations, warranties and other provisions contained in the agreements.
The duration of certain of these indemnification obligations does not provide
for any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make any
payments for these obligations and no liabilities have been recorded for these
indemnities in the accompanying unaudited condensed consolidated balance sheet.

                                       17








<PAGE>

6.    EQUITY

PREFERRED STOCK

      In May 2000, Alliance entered into a joint venture with Baxter Healthcare
Corporation ("Baxter") and sold 500,000 shares of its Series F Preferred Stock
for $20 million. Subsequently, the Company sold 293,750 additional shares for
$11.75 million. The shares are convertible based on the following provisions: 1)
at the option of Baxter on or after May 19, 2004; 2) termination of the license
agreement between Alliance and PFC Therapeutics; 3) at the option of Baxter on
or after the period of time in which the price of Alliance's common stock is
equal to or greater than $110 per share; or 4) at the option of Baxter upon a
change of control at Alliance. The Series F Preferred Stock has no annual
dividend and is not entitled to any voting rights except as otherwise required
by law.

      The Series F Preferred Stock is convertible at the following conversion
rates: 1) if Alliance's common stock price averages $110 per share over a 20-day
period through May 19, 2004, the conversion price for the Series F Preferred
Stock will be $110 per share; 2) if the license agreement between Alliance and
PFC Therapeutics is terminated, the conversion price will not be less than $50
per share; or 3) if the events discussed above do not occur, the conversion
price will be based on the market value of Alliance's common stock at the time
of conversion, subject to "Certain Limitations."

      In March 2004, Alliance terminated its license agreement with PFC
Therapeutics and therefore, the conversion price of the Series F Preferred Stock
to common stock is fixed at $50 per common share. Based on this conversion
price, the outstanding shares of Series F Preferred Stock are convertible into
635,000 shares of common stock. The Company has accounted for the Series F
Preferred Stock as a component of stockholders' equity.

COMMON STOCK

      During the nine months ended March 31, 2007, holders of certain Senior
Notes converted an aggregate of approximately $655,000 in principal into an
aggregate of 3,855,016 shares of common stock at a conversion price of $0.17 per
share (see Note 5).

7.    SUBSEQUENT EVENTS

      On April 2, 2007, Alliance issued a press release announcing that it held
two teleconferences with the holders of its outstanding Senior Notes regarding
the maturity date of the Senior Notes. The first teleconference took place on
March 30, 2007. This teleconference was repeated on April 2, 2007. In connection
with the teleconferences, Alliance requested that each holder of a Senior Note
execute an amendment to extend the maturity date of the Senior Note from April
1, 2007 to June 30, 2008. Alliance also announced its intent to file two
additional patents, one formulation patent and one method of use patent, related
to the OXYGENT technology.

      On May 15, 2007, Alliance announced that it had entered into an amendment
(the "2007 Amendment") of its Senior Convertible Promissory Note Purchase
Agreement and Registration Rights Agreement (as amended by the 2006 Amendment)
with essentially all of the existing holders of Alliance's Senior Notes.
Pursuant to the 2007 Amendment, the maturity date of each outstanding Senior
Note was extended as follows:

      (a)   The maturity date was extended from April 1, 2007 to the date ninety
      (90) days after the date of the 2007 Amendment. If the Company receives
      more than $1.5 million but less than $3 million in connection with a
      Qualified Financing (as defined in the 2007 Amendment) prior to the
      expiration of the ninety (90) days, the maturity date will automatically
      be extended to the date that is one hundred eighty (180) days after the
      date of the 2007 Amendment; and

      (b)   If the Company receives at least $3 million in connection with a
      Qualified Financing prior to the extended maturity date, the maturity date
      will automatically become June 30, 2008.

                                       18








<PAGE>

      The holders of the Senior Notes also agreed to subordinate their rights to
any debt that is issued in a Qualified Financing. Further, any financing that
qualifies as a Qualified Financing will not require additional approval from the
Senior Note holders.

      Alliance also agreed to issue to each current holder of a Senior Note an
additional note with principal amount equal to 20% of the outstanding principal
amount of such Senior Note on the date of the 2007 Amendment, which will result
in Alliance issuing new promissory notes in the aggregate principal amount of
approximately $1.8 million. These new notes will bear interest at the rate of
10% per annum, will mature on June 30, 2008 and may become convertible into
common stock of Alliance on the same terms as the Senior Notes at such time as
Alliance has a sufficient number of authorized and unreserved shares of common
stock to accommodate such conversion and Alliance provides written notice to the
holders of these notes that they are then convertible into common stock.

      The Company has further agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders receive 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders will now receive payment sharing until 120% of the payment participation
amounts have been received if they continue to hold their Senior Notes through
June 30, 2008.

      Alliance intends to seek additional financing that would qualify as a
Qualified Financing for the purpose of funding its continuing operations through
June 2008. Under the current plan, Alliance has enough funds to operate through
its fiscal year ending June 30, 2007.

      Subsequent to March 31, 2007 and as of May 11, 2007, holders of certain
Senior Notes converted an aggregate of approximately $449,000 in principal and
interest into an aggregate of 2,641,110 shares of our common stock at a
conversion price of $0.17 per share per the terms of the 2006 Amendment.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

(References to year are to the Company's fiscal year ended June 30)

PLAN OF OPERATION

      Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and as of
March 31, 2007, have an accumulated deficit of $495.5 million. We expect to
incur significant operating losses over at least the next few years as we
continue our research and product development efforts and attempt to
commercialize our products.

      Our revenues from operations have come primarily from collaborations with
corporate partners, including research and development, milestone and royalty
payments. Our expenses have consisted primarily of research and development
costs and administrative costs. To date, our revenues from the sale of products
have not been significant. We believe our future operating results may be
subject to quarterly fluctuations due to a variety of factors, including the
timing of future collaborations and the achievement of milestones under
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development.

                                       19








<PAGE>

FORWARD-LOOKING INFORMATION

      Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2007, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include, but are
not limited to, the inability to obtain adequate financing for the Company's
development efforts; the inability to enter into collaborative relationships to
further develop, manufacture and commercialize the Company's products; changes
in any such relationships, or the inability of any collaborative partner to
adequately commercialize any of the Company's products; the uncertainties
associated with the lengthy regulatory approval process, including uncertainties
associated with FDA decisions and timing on product development or approval; and
the uncertainties associated with obtaining and enforcing patents important to
the Company's business; and possible competition from other products.
Furthermore, even if the Company's products appear promising at an early stage
of development, they may not reach the market for a number of important reasons.
Such reasons include, but are not limited to, the possibilities that the
potential products will be found ineffective during clinical trials; failure to
receive necessary regulatory approvals; difficulties in manufacturing on a large
scale; failure to obtain market acceptance; and the inability to commercialize
because of proprietary rights of third parties. The research, development and
market introduction of new products will require the application of considerable
technical and financial resources, while revenues generated from such products,
assuming they are developed successfully, may not be realized for several years.
Other material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product approvals
and introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible technology
and/or other business acquisitions or transactions; and the increasing emphasis
on controlling healthcare costs and potential legislation or regulation of
healthcare pricing. Further cautionary information is contained in documents the
Company files with the SEC from time to time, including the Company's most
recently filed Annual Report on Form 10-KSB, and you are encouraged to read the
section entitled "Risk Factors" included in the Company's most recently filed
Annual Report on Form 10-KSB filed with the SEC on September 28, 2006.

RESEARCH AND DEVELOPMENT

      For the nine months ended March 31, 2007 and 2006, we incurred research
and development expenses of $1.6 million and $1.3 million, respectively, for
OXYGENT, an intravascular oxygen carrier that we are developing to augment
oxygen delivery in surgical patients at risk of acute oxygen deficit. Research
and development costs to date for our oxygen-therapeutic product, OXYGENT, total
approximately $160.4 million. While difficult to predict, we estimate that the
completion of clinical trials for OXYGENT will cost at least an additional $70
million. We do not anticipate that OXYGENT will reach the market for several
years, if at all, and, because of the numerous risks and uncertainties
associated with product development efforts, we are unable to predict with any
certainty the extent of any future expenditures or when material net cash
inflows from OXYGENT may commence, if at all.

      On November 7, 2006, we issued a press release disclosing that, even
though the German Competent Authority (regulatory agency) approved the start of
the Phase 2b clinical trial for OXYGENT to prevent post-op ileus resulting from
hypoxia during major surgery, the relevant German Ethics Committee responded
with a negative vote on the protocol based upon risk/benefit in the cardiac
patient population selected. Though we appealed this decision and offered
additional clarification and supporting data for the protocol, the German Ethics
Committee informed us that it declines approval of the study protocol as
submitted.

                                       20








<PAGE>

      On December 18, 2006, we reported that the French Ethics Committee
(Investigational Review Board) had approved the start of the trial and that the
French Competent Authority (regulatory agency) was continuing its review. That
review has been completed and the approval was granted to start the trial.
Subsequently Alliance submitted a clinical trial protocol revision to the French
Ethics Committee and the French Competent Authority, which modified the dosing
regimen to a dose-escalation protocol. This modification allows for the safety
and efficacy to be evaluated in three dose levels; however, this modification
potentially could add additional 30 to 60 patients to the trial, depending upon
the evaluation of efficacy at each dosing level. Alliance intends to begin the
trial in the second quarter of calendar 2007. We have enough funds to initiate
the trial, but will need additional funds to complete the study (see Note 7 to
our unaudited condensed consolidated financial statements).

      On February 6, 2007, we announced the manufacture and release for shipment
of OXYGENT for clinical trials. Alliance has now successfully completed the
contract manufacture of OXYGENT clinical trial material. The clinical supplies
will be used in the Phase 2b trial that will be conducted in Europe as described
above.

      On March 15, 2007, we announced that, in accordance with the current
regulations of the sFDA, the supplies for an IND application and clinical
development must be manufactured in a facility in China. As a result, Alliance
has agreed to accelerate the manufacturing technology transfer to Double-Crane,
which originally was planned to occur when Phase 3 trials were initiated in
China. Once clinical supplies are manufactured by Double-Crane, Double-Crane has
indicated that it will submit its IND application for initiation of the agreed
upon clinical development plan. Double-Crane will start a Phase 1 safety trial
in Chinese nationals immediately after the sFDA approves the IND application.

      Double-Crane has considerable experience in manufacturing large-volume
parenteral and IV solutions and has expressed a desire to supply Alliance with
clinical and commercial supplies of OXYGENT from its facilities in China. Supply
of OXYGENT to the U.S. would be contingent on Double-Crane's compliance to
Current Good Manufacturing Practices ("cGMP") and registration with the U.S.
FDA.

      Astral, our wholly owned subsidiary until September 6, 2005, was engaged
in the development of immunoglobulins that are engineered to bear specific
disease-associated peptides. For the nine months ended March 31, 2006, Astral
incurred research and development expenses of $25,000. In September 2005,
pursuant to the Astral Agreement, approximately $730,000 of accrued Astral
expenses were assumed by MultiCell (see Note 3 to our unaudited condensed
consolidated financial statements).

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2007 AS COMPARED WITH THREE MONTHS ENDED MARCH 31,
2006

      We recorded $521,000 in revenue for the three months ended March 31, 2007,
compared to $26,000 for the three months ended March 31, 2006. The revenue for
this year's quarter was primarily a milestone payment of $500,000 that was
recognized as revenue upon satisfaction of certain obligations under the
Double-Crane Agreement. The revenue for last year's quarter consisted of
royalties from products other than IMAGENT.

      Research and development expenses decreased by $200,000, or 43%, to
$269,000 for the three months ended March 31, 2007, compared to $469,000 for the
three months ended March 31, 2006. The decrease in research and development
expenses was primarily a decrease of $111,000 in contract manufacturing of
OXYGENT clinical trial material and $113,000 decrease in clinical and regulatory
expenses, partially offset by increases in OXYGENT archiving, storage and
travel.

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<PAGE>

      General and administrative expenses decreased by $47,000, or 15%, to
$264,000 for the three months ended March 31, 2007, compared to $311,000 for the
three months ended March 31, 2006. The decrease in general and administrative
expenses was primarily the result of a reduction in staff by eliminating a
fulltime patent attorney/corporate counsel position and decreases in insurance
and office-related expenses.

      Investment income decreased by $27,000 to $22,000 for the three months
ended March 31, 2007, compared to $49,000 for the three months ended March 31,
2006. The decrease was primarily a result of lower cash balances during the
current period.

      Interest expense was $221,000 for the three months ended March 31, 2007,
compared to $161,000 for the three months ended March 31, 2006. The increased
expense for the current period was primarily the result of recording accrued
interest at a higher interest rate on the Senior Notes per terms of the 2006
Amendment (see Note 5 to our unaudited condensed consolidated financial
statements).

NINE MONTHS ENDED MARCH 31, 2007 AS COMPARED WITH NINE MONTHS ENDED MARCH 31,
2006

      Our revenue increased to $548,000 for the nine months ended March 31,
2007, compared to $103,000 for the nine months ended March 31, 2006. This
increase was primarily due to a milestone payment of $500,000 that was
recognized as revenue upon satisfaction of certain obligations under the
Double-Crane Agreement, partially offset by a decrease in royalties received
from sales of products other than IMAGENT.

      Research and development expenses increased by $301,000, or 23%, to $1.6
million for the nine months ended March 31, 2007, compared to $1.3 million for
the nine months ended March 31, 2006. The increase in research and development
expenses was primarily due to the increase in contract manufacturing of OXYGENT
clinical trial material.

      General and administrative expenses increased by $232,000, or 25%, to $1.1
million for the nine months ended March 31, 2007, compared to $911,000 for the
nine months ended March 31, 2006. The increase in general and administrative
expenses was primarily the result of an accrual of $249,000 in possible income
tax and penalty liabilities for tax year 2003 (fiscal year 2004) in connection
with the sale of the IMAGENT assets, which we are actively investigating as to
possible alternative treatments. During the current period, we also recorded
stock-based employee and director compensation of $43,000 (see Note 1 to our
unaudited condensed consolidated financial statements). These increases were
partially offset by a decrease in personnel-related expenses.

      For the nine months ended March 31, 2007, we recorded a gain on the change
in fair value of derivative liability of $357,000 related to recording
derivative liabilities at fair value in connection with the 2006 Amendment (see
Note 5 to our unaudited condensed consolidated financial statements).

      For the nine months ended March 31, 2007, we recorded a gain on the
disposition of assets of $659,000. This amount primarily consisted of payments
per the terms of the Imcor Settlement Agreement of $100,000, and the recognition
of approximately $500,000 of deferred royalties during the period in connection
with the IMAGENT asset sale transaction. For the nine months ended March 31,
2006, we recorded a gain on the disposition of liabilities of $730,000 recorded
in connection with the assumption of liabilities per the terms of the Astral
Agreement and a gain on the disposition of assets of $476,000 resulting from the
recording of payments from Imcor of $200,000 to fund our obligations, and the
assumption by Imcor of certain of our obligations and settlements with various
vendors and creditors of $276,000 during the period in connection with the
IMAGENT asset sale transaction.

      Investment income decreased by $52,000 to $99,000 for the nine months
ended March 31, 2007, compared to $151,000 for the nine months ended March 31,
2006. The decrease was primarily a result of lower cash balances during the
current period.

                                       22








<PAGE>

      Other income was $82,000 for the nine months ended March 31, 2006, a
result of proceeds recorded from the sale of raw material.

      Interest expense was $711,000 for the nine months ended March 31, 2007,
compared to $475,000 for the nine months ended March 31, 2006. The increased
expense for the current period was primarily the result of recording accrued
interest at a higher interest rate on the Senior Notes per terms of the 2006
Amendment (see Note 5 to our unaudited condensed consolidated financial
statements).

LIQUIDITY AND CAPITAL RESOURCES

      Since inception, we have funded our operations primarily through the sale
of equity securities, payments from our collaboration agreements and debt
financing. From inception to March 31, 2007, we had received $243 million in net
proceeds from sales of our equity securities, $260.8 million in payments from
collaboration agreements and $74.3 million in debt financing of which $38
million of such debt has been converted into equity and $25.9 million of such
debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock.

      At March 31, 2007, we had approximately $1.3 million in cash and cash
equivalents compared to $3.6 million at June 30, 2006. The decrease resulted
primarily from net cash used in operations of $2.4 million. At March 31, 2007,
we had a working capital deficit of $10.7 million, compared to a working capital
deficit of $9.6 million at June 30, 2006. The deficit increase was principally
due to the net cash used in operations, a net increase of $95,000 in accounts
payable and accrued expenses and $711,000 in accrued interest on the Senior
Notes, partially offset by the reclassification of deferred revenue of $500,000,
the reduction of fair value of the derivative liability of $357,000, the
reclassification of the derivative liability of $484,000 to additional paid-in
capital, the conversion of $655,000 of Senior Notes and a net increase in fixed
assets. Our operations to date have consumed substantial amounts of cash and are
expected to continue to do so for the foreseeable future.

      Net cash used in operating activities totaled $2.4 million for the nine
months ended March 31, 2007, compared to $2.8 million for the nine months ended
March 31, 2006. The decrease in net cash used in operating activities during the
nine months ended March 31, 2007 was primarily due to a decrease in general and
administrative payments.

      Net cash provided by investing activities totaled $26,000 for the nine
months ended March 31, 2007, primarily due to $100,000 received under the terms
of the Imcor Settlement Agreement, less $74,000 in equipment purchases. Net cash
provided by investing activities totaled $196,000 for the nine months ended
March 31, 2006, primarily due to proceeds from Imcor to fund payments to
vendors.

      At March 31, 2007, the following approximate obligations were outstanding:

      (a)   $290,000 owed to various vendors;

      (b)   $249,000 in back corporate income taxes and penalties, and $136,000
      in payroll and other expenses;

      (c)   $11.3 million in Senior Notes, including $1.9 million in accrued
      interest; and

      (d)   $750,000 in other liabilities.

      Until we can generate significant continuing revenues, we expect to
satisfy our future cash needs through strategic collaborations, private or
public sales of our securities, debt financings or by licensing all or a portion
of our product candidates or technology. We cannot be certain that additional
funding will be available to us on acceptable terms, or at all. If funds are not
available, we may be required to delay, reduce the scope of, or eliminate one or
more of our research and development programs or our commercialization efforts.

                                       23








<PAGE>

      In April 2006, Alliance entered into the 2006 Amendment of its Senior
Notes (see Note 5 to our unaudited condensed consolidated financial statements).
Pursuant to the 2006 Amendment, the maturity date of each outstanding Senior
Note was extended from March 24, 2006 to April 1, 2007. The conversion price of
each Senior Note was reduced from $0.25 to $0.17 and the interest that will
accrue on each Senior Note from March 25, 2006 through April 1, 2007 was
increased from 6% to 10% per annum. In addition to amounts due under the Senior
Notes, the holders of the Senior Notes are entitled to receive up to an
aggregate of $11.4 million in payments based on future royalties from OXYGENT
product sales (or under certain conditions from milestone payments) payable at a
rate equal to 50% of such payments that Alliance actually receives.

      We believe we have working capital to fund our operations for the next
three months; however, we did not have the resources to repay the Senior Notes
on April 1, 2007 when they became due and payable. In two teleconferences
regarding this obligation, Alliance requested that each holder of a Senior Note
execute an amendment to extend the maturity date of the Senior Note from April
1, 2007 to June 30, 2008. This 2007 Amendment has been approved by substantially
all of the Senior Note holders (see Note 7 to our unaudited condensed
consolidated financial statements). Alliance intends to seek additional
financing to fund its continuing operations through June 2008. Further, we are
seeking additional collaborative research and development relationships with
suitable corporate partners for our products. Because adequate funds have not
been available to us in the past, we have already delayed our OXYGENT
development efforts and have delayed, scaled back, and/or eliminated one or more
of our other product development programs.

      The accompanying unaudited condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. We have incurred operating
losses through March 31, 2007. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

WHERE YOU CAN FIND MORE INFORMATION

      We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and must file reports, proxy statements and
other information with the SEC. The reports, information statements and other
information we file with the Commission can be inspected and copied at the
Commission Public Reference Room, 100 F Street, N.E. Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at (800) SEC-0330. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy, information statements and
other information regarding registrants, like us, which file electronically with
the Commission.

      We were incorporated in New York in 1983. Our principal executive offices
are located at 4660 La Jolla Village Dr., Suite 740, San Diego, California
92122, and our telephone number is (858) 410-5200.

      Our common stock is traded on the OTCBB under the symbol "ALLP.OB."

CRITICAL ACCOUNTING POLICIES

      There were no significant changes in critical accounting policies or
estimates from those at June 30, 2006.

                                       24








<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES

      (a)   Evaluation of Disclosure Controls and Procedures. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures. Based upon that evaluation, the
CEO and CFO concluded that as of March 31, 2007 our disclosure controls and
procedures were effective at the reasonable assurance level in timely alerting
them to the material information relating to the Company (or the Company's
consolidated subsidiaries) required to be included in the Company's periodic
filings with the SEC, subject to the various limitations on effectiveness set
forth below under the heading, "Limitations on the Effectiveness of Internal
Controls," such that the information relating to the Company, required to be
disclosed in SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to the Company's management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.

      (b)   Changes in internal control over financial reporting. There has been
no change in the Company's internal control over financial reporting that
occurred during the three-month period ended March 31, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS

      The Company's management, including the CEO and CFO, does not expect that
our disclosure controls and procedures or our internal control over financial
reporting will necessarily prevent all fraud and material error. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.

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<PAGE>

PART II  OTHER INFORMATION:

ITEM 1.  LEGAL PROCEEDINGS

         None.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

      During the quarter ended March 31, 2007, holders of certain Senior Notes
converted an aggregate of approximately $217,000 in principal into an aggregate
of 1,277,546 shares of our common stock at a conversion price of $0.17 per
share.

      The offers and sales of these securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, (the "Securities
Act") in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder as transactions by us not involving a public offering.
The recipients of the securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to share certificates issued in such transactions. All recipients
had adequate access to information about us.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      On April 1, 2007, our Senior Notes in the aggregate amount of $11.3
million, which amount includes unpaid principal together with accrued interest,
became due and payable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

ITEM 5.  OTHER INFORMATION

      None.

ITEM 6.  EXHIBITS

(a)   Index to Exhibits

  EXHIBIT   DESCRIPTION

   31.1     Certification of our Chief Executive Officer, pursuant to Securities
            Exchange Act rule 13a-14(a) and 15d-14(a) as adopted pursuant to
            Section 302 of the Sarbanes Oxley Act of 2002. *

   31.2     Certification of our Chief Financial Officer, pursuant to Securities
            Exchange Act rule 13a-14(a) and 15d-14(a) as adopted pursuant to
            Section 302 of the Sarbanes Oxley Act of 2002. *

   32.1     Statement of our Chief Executive Officer under Section 906 of the
            Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

   32.2     Statement of our Chief Financial Officer under Section 906 of the
            Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

*  Filed Herewith.

                                       26








<PAGE>

                                   SIGNATURES

      In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                        ALLIANCE PHARMACEUTICAL CORP.
                                        (Registrant)

Date: May 15, 2007                      By: /s/ Duane J. Roth
                                            ------------------------------------
                                            Duane J. Roth
                                            Chairman and Chief Executive Officer

                                        By: /s/ Edward C. Hall
                                            ------------------------------------
                                            Edward C. Hall
                                            Chief Financial Officer

                                       27